TCF Falls a Penny Short on Low Margin - Analyst Blog

TCF Financial Corporation's (TCB) fourth quarter 2010 earnings came in at 22 cents per share, a penny short of the Zacks Consensus Estimate of 23 cents. This compares unfavorably with the earnings of 26 cents in the prior quarter and favorably with 15 cents in the prior-year quarter.

For fiscal year 2010, TCF reported net income of $1.05 per share, down from the Zacks Consensus Estimate of $1.06. However, this compares favorably with 54 cents reported in the prior year.

Decreased non-interest income, net interest margin, sluggish economic recovery and increased regulatory trouble have affected the quarter results. These negatives were offset by a fall in non-interest expenses and decline in non-performing assets.

Net income came in at $30.7 million in the quarter, significantly up from $19.5 million in the year-ago quarter. For fiscal year 2010, net income was $146.6 million, up 68.3% from $87.1 million in the prior year.

Performance in Detail

Net interest income was $174.3 million, up 2.7% from $169.6 million in the year-ago quarter. Decreased rates paid on deposits and growth in Specialty Finance loans and leases led to an increase in income, partially offset by the impact of increased asset liquidity and decreased income from consumer loans. For the fiscal year 2010, net interest income reported was $699.2 million, up 10.5% year over year.

Net interest margin in the quarter was 4.04%, down 3 basis points year over year. Increased asset liquidity and lower asset yields attributed to the lower interest rate environment, the mix of fixed and variable rate loans and leases and higher average balances of non-accrual loans and leases, negatively affected the margin.

However, lower average rates on deposits partially offset the decline. For full year 2010, net interest margin was 4.14%, plunged from 3.87% in the prior year.

Non-interest income came in at $141.5 million, down 1.2% from $143.1 million in the prior-year quarter, attributed to lower leasing and equipment finance revenue and decreased banking fees and service charges. These decreases were partly offset by high card revenue. For fiscal year 2010, TCF reported non-interest income of $538.0 million, up 2.3% from $525.9 million in the prior year.

TCF reported total revenue of $315.8 million in the quarter, up 1.0% from $312.8 million year over year, surpassing the Zacks Consensus Estimate of $301.0 million. For full year 2010, total revenue was $1,237.0 million, up 6.8% year over year, and also outpaced the Zacks Consensus Estimate of $1,217.0 million.

Non-interest expense was $190.5 million, down 7.9% from $206.8 million in the prior-year quarter. The decrease in non-interest expense reflects lower occupancy and equipment expense, lower compensation and employee benefits costs and decreased marketing and advertising expenses.

These decreases were partially offset by higher FDIC premiums, increased foreclosed real estate and repossessed asset expenses. For fiscal year 2010, TCF reported non-interest expenses of $763.1 million, down 0.6% year over year.

Evaluation of Credit Quality

Overall, mixed trend in credit quality was recorded, as a declinein non-performing assets and non-accrual loans and leases, were offset byincrease in other credit metrics.

Provisions for credit losses plunged 30.9% sequentially to $77.6 million, principally due to increased reserves and charge-offs in the commercial real estate portfolio.

Net loan and lease charge-offs were $64.9 million in the quarter, up 12.3% from $57.8 million sequentially. The increase was primarily due to increase in commercial real estate, consumer real estate and commercial business net charge-offs.

Allowance for loan and lease losses was $265.8 million, up 5.0% from $253.1 million sequentially. Non-accrual loans and leases decreased 6.6% to $345.3 million sequentially driven by a decline in new non-accrual loans, primarily commercial loans.

Non-performing assets decreased 3.9% sequentially to $486.4 million in the fourth quarter of 2010.

Capital Ratios

At the end of the reported quarter, the company's total risk-based capital was $1.8 billion, or 12.98% of risk-weighted assets, up from $1.5 billion, or 11.12% of risk-weighted assets at the end of 2009. Tier 1 common capital was $1.4 billion, or 9.71% of risk-weighted assets, increased from $1.0 billion, or 7.65% of risk-weighted assets at the end of 2009.

Performance by Peers

Major competitor of TCF Financial, U.S. Bancorp (USB), reported fourth quarter 2010 positive income of 49 cents per share, which was in line with the Zacks Consensus Estimate.

Quarterly results of U.S. Bancorp's reflected growth in revenues resulting from business growth initiatives taken by the company, including acquisitions. Credit metrics also showed improvements. However, the positives were partially offset by an increase in expenses.

Another peer, Wells Fargo & Company (WFC) also reported fourth quarter 2010 operating earnings of 61 cents per share, almost in line with the Zacks Consensus Estimate of 62 cents. Quarterly results reflect a better-than-expected increase in revenues.

Also, the company experienced a decent reserve release of $850 million due to improved portfolio performance. But an increase in expenses played the spoil sport and therefore the results did not impress.

Our Take

Despite sluggish economic recovery and regulatory issues, TCF reported positive net income. Further, many banks have suspended their foreclosures due to paperwork flaws. TCF having no such issues continues to process foreclosures, which act as a positive catalyst for the company.

We expect TCF to maintain its superior position in the market based on its positive approach to market conditions. However, the regulatory reform and low interest rate environment might affect the company's near-term results to some extent.

TCF currently retains its Zacks #5 Rank, which translates to a short-term Strong Sell rating. Considering the fundamentals, we are maintaining our Underperform recommendation on the stock.

 
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